Friday, November 16, 2012

Hostess, based in Irving, Texas, has already reached a contract agreement with its largest union, the International Brotherhood of Teamsters. But thousands of members in its second-biggest union went on strike late last week after rejecting in September a contract offer that cut wages and benefits. Officials for the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union say the company stopped contributing to workers’ pensions last year.

But listen to the video below, and hear the fears of the Bakers Union, that if they make a concession to Hostess, other companies would want similar concessions.

Since 1990, teenage alcohol
consumption has doubled. Since World War II, alcohol intake for the
population as a whole has doubled, with a third of that increase
occurring since just 1995. The United Kingdom has very high rates of
binge and heavy drinking, with the average Brit consuming the equivalent
of nearly ten liters of pure ethanol per year.

It’s apparent in their hospitals, where since the 1970s rates of
cirrhosis and other liver diseases among the middle-aged have increased
by eightfold for men and sevenfold for women. And it’s apparent in their
streets, where the carousing, violent “lager lout” is as much a symbol
of modern Britain as Adele, Andy Murray, and the London Eye.

The US, is in much better (?) shape:

A third of the country does not drink,
and teenage drinking is at a historic low. The rate of alcohol use among
seniors in high school has fallen 25 percentage points since 1980.
Glassing is something that happens in movies, not at the corner bar.

Part of the difference is the inefficient 3-tiered distribution system in the US, which is not only much less efficient at delivering beer to consumers, but also results in so-called "triple marginalization," each stage of the vertical supply chain takes its own markup, with the result that the final price is much higher than would be charged by a vertically integrated producer-distributor-retailer.

...most states, requires that the alcohol
industry be organized according to the so-called three-tier system. The
idea is that brewers and distillers, the first tier, have to distribute
their product through independent wholesalers, the second tier. And
wholesalers, in turn, have to sell only to retailers, the third tier,
and not directly to the public. By deliberately hindering economies of
scale and protecting middlemen in the booze business, America’s system
of regulation was designed to be willfully inefficient, thereby making
the cost of producing, distributing, and retailing alcohol higher than
it would otherwise be.

Tuesday, November 13, 2012

Some 100 California dairy farmers are shutting their doors this year,
according to the Milk Producers Council, a group representing dairy
farmers.

Those of you who read this blog know that markets would fix the problem, leading to higher prices which would reduce demand from processors and increase supply from dairies. However, in California, they are using regulators, courts, and the legislature, rather than markets, to set prices:

Last week, four groups representing dairy farmers ... filed a
lawsuit in August against Karen Ross, the secretary of the California
Department of Food and Agriculture, which sets the price that cheese
makers pay for milk.

But dont worry, help is on the way. Last month, Ms. Ross "assembled a task force of
producers and processors to study the issue."

Thursday, November 8, 2012

Here is a really simplified example. Suppose you are a large company generating $1B in revenue, and you have a market cap of $5B. You want to build an important new product that your CTO estimates will increase your revenue 10%. At a 5-1 price-to-revenue ratio, a 10% boost in revenue means a $500M boost in market cap. So you are willing to spend something less than $500M to have that product.

Monday, November 5, 2012

Hit by a cascade of complaints from consumers, the New York Attorney
General’s Office launched a probe on Monday into price gouging in the
state in the wake of Hurricane Sandy.

The complaints centered on gas-price hikes but also include reports
of jacked-up prices on everything from emergency supplies like
generators to higher hotel rates and loftier prices for food and water.

“Our office has zero tolerance for price gouging," NY Attorney
General Eric Schneiderman said in a statement. "We are actively
investigating hundreds of complaints we've received from consumers of
businesses preying on victims of Hurricane Sandy, and will do everything
we can to stop unscrupulous individuals from taking advantage of New
Yorkers trying to rebuild their lives."

Not only do higher prices cause shortages to disappear (by encouraging conservation on the demand side, and increases in supply), but they also give consumers and firms an profit motive to find ways to alleviate shortages in the future.

Managerial Economics: A Problem Solving Approach, 4th ed.

We wrote a managerial economics textbook (Amazon, Barnes & Noble, Cengage) to teach students how to solve business problems (7 min. video). We started this blog to support those who use the book, and to keep up with developments in the field.